The last few years have seen a number of start-ups lending money based on factors other than credit scores. Here are a few highlighted in a recent Economist article:
- Karrot: “Karrot worries less about borrowers’ credit history—the conventional approach—than about their cash flow. Customers must allow Karrot to monitor their current accounts and other financial data, such as credit-card bills. A big decline in income prompts an inquiry about an extended payment plan (to pre-empt a default); an increase prompts an offer of more credit. The initial evaluation takes only four minutes. Growth has been impressive: Karrot expects to lend $1 billion this year. Its default rate is 5%.”
- Upstart: “Upstart, based in Palo Alto, is another firm learning to look beyond the credit record, in this case to borrowers’ educational history—an indicator of future earnings and thus the capacity to repay debt.’
- Vouch: “Among the most novel experiments is Vouch, based in San Francisco, which began providing small amounts of credit to people with poor credit scores last October. Its first customer was a medical student who received $5,000. To diminish the risk of default, borrowers must get several friends or family members to guarantee a small part of the loan. Vouch determines the amount customers can borrow based on its assessment of their ability to pay. But the interest rate hinges on the amount pledged by supporters.”
Of course, one doesn’t really know how good their loan underwriting is, until a recession comes along…I recall a student lender a few years back that touted their “proprietary model” that enabled them to make loans to 18 year old students (without cosigners). Well, the downturn hit and their model blew up (as did the company)!
Ask your students: If your students had to invest in one of these companies what would they choose and why?